Gazprom’s Nightmare

Shale gas extraction, if implemented, could turn Ukraine into an influential player on the European gas market

Ukraine has taken yet another step toward extracting its own shale gas. Royal Dutch Shell and Chevron Corporation won a tender to extract gas at the Yuzivka and Oleske fields.

ENERGY INDEPENDENCE DAY?

At this point, Chevron and Shell representatives and Ukrainian authorities are all optimistic. “We will become fully energy-independent by 2020,” Eduard Stavytsky, Ukraine’s Minister of Environment and Natural Resources, promised at a seminar for shale gas exploration and extraction held by the US Civil Research and Development Foundation in Kyiv at the end of May. The Yuzivka and Oleske fields are projected to provide (respectively) 20 and 10 billion cubic meters of shale gas annually. This amount could replace the 30 billion cubic meters of gas Ukraine currently imports from Russia. Meanwhile, the government is preparing tenders for the Scythian and Foros fields in the Black Sea. According to Mr. Stavytsky, Slobozhanske field in Kharkiv Oblast and gas fields in Poltava, Dnipropetrovsk and Volyn Oblasts are currently being explored as well.

The Cabinet of Ministers denies any prospect of suspending preparations for shale gas extraction for political reasons or due to possible gas price discounts from Gazprom. This assertion is backed by several powerful international companies that have shown great interest in Ukraine’s gas market. Mr. Stavytsky claims that Shell has ambitious plans to begin extracting shale gas in Ukraine in 2015.

Yet, if all ends well and the gas distribution contract is signed in autumn as planned, the winners will have to set up a joint venture with Nadra Ukrayiny (Ukraine’s Wealth), a national joint stock company, and SPK-GeoService, a limited liability company with reported links to top Ukrainian officials. Ownership of the potential joint venture would be split evenly between Ukrainian companies and foreign stakeholders. With this in mind, an expected shift of government in Ukraine may subject the deal to later revision and expose it to elements of corruption among the joint venture’s Ukrainian partners. This would cause problems for shale gas extraction and prolong project deadlines.

GEOPOLITICAL ASPECTS

America’s growing interest in shale gas extraction in the EU and Central and Eastern European countries vulnerable to Russia’s energy blackmailing appears promising. This interest is based on purely geopolitical and economic motivations, as US companies are the leaders in shale gas extraction and thus stand to gain the lion’s share of the market in countries like Ukraine.

John Tefft, US Ambassador to Ukraine, stated at the abovementioned seminar that the energy security situation could change dramatically for Ukraine if preliminary estimates of its 9.5 trillion cubic meters of shale gas deposits are confirmed. This may transform the country from an importer into a significant exporter over the course of just a few years. When appointed as the US Ambassador to Ukraine, Mr. Tefft paid special attention to the need to reform Ukraine’s energy sector and noted that the US and EU were ready to provide assistance as they both recognized the realistic energy threat that Putin’s Russia poses to Ukraine.

Shale gas extraction in Ukraine could change the situation in Europe’s gas market dramatically. If optimistic gas deposit projections come true, Ukraine could export most of its gas. Poland has similar energy prospects but is currently running a few years ahead of Ukraine in terms of exploring its extensive resources of shale gas, while consuming three to four times less than Ukraine. Given these developments, Central Europe may be looking at a revolution. Mr. Tefft expects that shale gas will change the energy security game completely in Ukraine, just like it did in the US. According to experts, Russia will gradually lose its political impact on European governments if shale gas is intensely extracted elsewhere in Europe.

LAND, WATER AND PROTESTS

Top Kremlin officials and Gazprom executives have said before that shale gas is nothing more than an anti-Russian PR campaign. Indeed, Gazprom’s fears are well-founded—until recently, its information campaign struggled to convince the masses that exploring Ukrainian shale gas fields was economically inefficient and unpromising. Yet, one powerful instrument tested in other European countries remains in its arsenal: environmentalists can set public opinion against shale gas exploration, claiming that it “carries the risk of an environmental disaster in densely populated areas.”

Meanwhile, government officials insist that the environmental aspects of hydraulic fracturing or “fracking” were analyzed thoroughly as the tender was prepared. According to a widespread statement, these technologies contaminate drinking water and soil around the drilling site. However, the supporters of shale gas extraction claim that drinking water is 300-400m under the surface while shale gas deposits are 3,000-4,000m deep, preventing the water from the fractures from mixing with drinking water. The contaminated water used for fracking is later re-used. “I’d like to assure you that these companies (Shell and Chevron – ed.) pay a lot of attention to the environmental risks associated with extraction technologies and land reclamation – more than I could expect,” Ukraine’s Minister of Environment said. “I’m 100% sure that there are no environmental risks in this.” Officials suggest that the environmental aspect will cause much speculation and provoke protests, yet they are ready to protect their viewpoint.

Moreover, shale gas extraction technology has many opponents worldwide, especially in the US. Yet, Polish and US experts claim that environment-oriented statements often conceal the business interests of the old masters of the market. Gas importers were involved in protests against shale gas in the US as it stifled their business. According to Mr. Stavytsky, France “is dependant on nuclear energy… so they lobbied the decision (to ban shale gas extraction in France – ed.) in their parliament.” Russia’s criticism is ever more surprising as Rosneft and Gazprom Neft are among the biggest clients of Schlumberger, a company that does hydrofracturing.

Yet, Gazprom is likely to take every effort to keep hold of the Ukrainian market. With unpredictability as the key sustainable feature of the current government, there is no guarantee that it will not suspend shale gas projects if Russia makes gas price concessions. After all, the Ukrainian government has not completed a single energy initiative to decrease its dependence on Russia over the past two and a half years. It is likely that shale gas projects are yet another instrument used by Ukraine’s rulers to blackmail the Kremlin and Gazprom in order to secure a significant gas discount for enterprises owned by Ukrainian oligarchs.

On May 16, Ukrainian filmmaker currently jailed in Russia as a political prisoner went on a hunger strike. In a public letter he wrote that he would only stop the strike if all 64 Ukrainian prisoners jailed in Russia for politically-motivated grounds are released

The opposition in Ukraine is mostly reactive and it chooses actions that will be most useful for criticizing the current Administration or gaining the attention of a specific part of the electorate. What Ukraine needs most right now is a consolidating program and a party that could present its own alternative for the country